Rachel Millard
Thu, October 28, 2021,
The company logo hangs at a Shell gas station
Corporate raider Dan Loeb’s plot to break up Shell risks harming its efforts to tackle climate change, top investors have warned, in a sign he may face a struggle to win over the City.
The pugnacious Third Point founder, 59, has argued the FTSE 100 company should split its oil and renewable assets into separate businesses to both drive better returns and greater investment, and stop trying to be “all things to all people”.
Third Point’s $750m (£543m) stake in the $187bn company, revealed this week, amounts to a slim 0.25pc, but analysts warned of a repeat of activist changes in June at US oil major Exxon caused by activist Engine No.1, despite an even smaller stake.
Top shareholders greeted Loeb cautiously, however, warning the integrated business would be difficult to separate and that Shell’s shift towards cleaner energy rests on several cogs working together, as well as cash from oil being re-invested in renewables.
Shell is one of the world’s largest oil, gas and chemicals companies, pumping out more than 887m barrels of oil equivalent in 2020.
Its 87,000 employees work in more than 70 countries, aiding its growth in wind power, hydrogen and carbon capture. It also has more than 40,000 forecourts and a small UK household energy supplier.
One large institutional investor with a stake in Shell of a similar size to Third Point’s, said he could see what the activist was trying to do but added: “I’ve got a number of issues with it ... I think that peeling apart the two businesses would not be easy.
“While the businesses are together, the existing oil and gas business provides cash flow to help feed the new renewables business.
“People talk about energy transition, not energy step change. You need the time and cash flow to affect the transition.
“Maybe what they are thinking is that you can put a big fancy multiple on the renewables business. That doesn’t help the business. That doesn’t help the end goals of decarbonising the energy system.”
The investor added shareholders unhappy with owning a fossil fuel company such as Shell, in an era characterised by its push against climate change, had already sold out. “I don’t feel there is any underlying disquiet” among those who remain, he added.
Separately, Iain Pyle, investment director for UK equities at top 10 Shell shareholder Abrdn, said splitting it up “makes sense as a spreadsheet exercise” and would create share price value, but that “disentangling the value chains in which Shell operates is really tough”.
He added: “I do believe the company's argument: for them to have maximum impact in terms of transition and moving the company and the energy mix forward, you need to work through the whole value chain and need to have it in one company.
“So I would be cautious about splitting it up - even though I can see how it would create value.”
Pyle believes Third Point’s activism is unlikely to result in a break-up of the company but if it means Shell gets “better at communicating the value” in different parts of the business, that would be helpful.
New York-based Third Point’s attack on the Anglo-Dutch firm comes amid a major energy system shake-up as renewables start to replace fossil fuels to tackle climate change. Oil companies are under pressure to cut their emissions and change products, while also delivering consistent returns.
Shell is investing about $2-$3bn per year in renewables and says it is also working with customers to try and change demand as well as supply. It has pledged to cut the carbon intensity of its products to net zero by 2050.
Rivals such as BP have set more headline-grabbing targets such as building 50GW of renewables by 2030 - more than the UK's entire capacity - leaving Shell open to accusations its strategy is less understood by investors.
Third Point accused it of an “incoherent, conflicting set of strategies”. Shell’s London-listed shares remain down on pre-pandemic levels, closing at £17.06 on Thursday.
Addressing the calls for a break-up, RBC analyst Biraj Borkhataria said Shell’s “conglomerate discount is substantial” and reckons the business is worth closer to $250bn on a sum-of-the-parts basis, putting renewables at $10bn and oil production at $68bn.
But he added breaking up the company “could potentially destroy some of the integration benefits of a larger company.”
Chief executive Ben van Beurden, who took the helm in 2014 and led Shell’s £47bn takeover of gas major BG Group in 2017, insisted the company’s strategy was “incredibly coherent” on Thursday as he fought back against rising pressure on fossil fuel producers from several sides.
In May, a Dutch court ordered Shell to cut its emissions faster. The company has also been told it is “not welcome” at the United Nations’ Cop26 climate change conference starting next week in Glasgow, while van Beurden also discovered this week, he said via the press, that Dutch pension giant ABP was ditching fossil fuels, including Shell.
“I don’t think our strategy is failing,” he stressed, complaining of “symbolic” gestures causing investors to ditch fossil fuels. “We have to switch from a carbon intensive system to a carbon-lean system and companies like us need to make that happen.”
He did, however, set out tougher cuts to Shell’s emissions. The company now plans to cut its own emissions in half by 2030. Still, it has not toughened the target for its customers’ emissions, as requested by the Dutch court ruling.
Van Beurden spoke as his company reported a mixed set of third quarter results. Sky-high gas prices helped deliver record $17.5bn free cash flow, but outages and other one-offs meant earnings overall missed analysts’ expectations.
Was he feeling the pressure personally? “I understand we are at a very critical time for the industry, but more importantly also for society to do the right things,” he said.
“Sometimes indeed that comes with personal challenges as well.
“But I think it is something that I carry off, hopefully to good effect but definitely with a great sense of responsibility and personal pride. But the entire company also feels the same thing.”
With Loeb, whose previous targets include Sony and Yahoo, on its back, that pressure is only set to grow.
Profile: Daniel Loeb
Daniel Loeb, the Wall Street mogul calling for a breakup of Shell, is a well-known controversial activist behind campaigns against Sony, Yahoo and Sotheby’s, writes Matt Oliver.
The chief executive of New York-based investor Third Point has built an estimated fortune of $4bn ($2.9bn) by shaking up companies and industries in loud fashion, gaining a reputation for sending pugnacious “poison pen” letters to corporate targets.
In a 2012 missive to internet search giant Yahoo, he accused then-boss, Scott Thompson, of falsely claiming he had a degree in computer science that “undermines his credibility as a technology expert” and “reflects poorly on [his] character”.
Thompson’s qualification was, in fact, in accounting. Loeb claimed to have uncovered the information using a “rudimentary Google search”.
Yahoo blamed the issue on an "inadvertent error" but Thompson was soon ousted and replaced.
Daniel Loeb
Resulting changes at Yahoo, and its share price surge, are credited as one of Loeb’s greatest victories - he netted more than $1bn in profits on his original investment.
But while his crusade against Yahoo could be seen as classic hedge fund play, rooting out vital information that others missed, Loeb’s other campaigns have proved more contentious.
Launching an attack on Sotheby’s the next year, the hedge fund manager likened the auctioneer to “an old master painting in desperate need of restoration” and told chairman and chief executive William Ruprecht that he lacked “innovation or inspiration”.
He also lambasted Ruprecht’s memberships of “elite country clubs” and accused Sotheby’s bosses of holding “extravagant” meals costing “hundreds of thousands of dollars”.
The claims were dismissed by Sotheby’s as “incendiary and baseless”.
That same year Loeb also drew headlines for attacks on Sony, which he said treated its entertainment arm like a “red-headed stepchild” even as films “bombed spectacularly”.
It attracted the ire of Hollywood royalty George Clooney, who accused California-born Loeb of meddling in artistic matters he did not understand.
His battles don’t stop at business. Loeb is said to have outbid rival activist Carl Ihcan for a five-bedroom penthouse in a 39-floor apartment block overlooking New York’s Central Park, paying $45m.
He also reportedly owns a waterfront house in the Hamptons, a $20m seven-bedroom home in Miami Beach bought this year and a $52m, 200-ft long yacht, named “April Fool”.
More recently he has found himself in a row with London-based Asset Value Investors, a shareholder in Third Point, which accused the 59-year-old of "hypocrisy" over the way he runs his own fund. At least he can live a life of luxury, with his wife and son.
No comments:
Post a Comment